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An examination of Australian gold mining firms' exposure over the collapse of gold price in the late 1990s

Fang, Victor, Lin, Edward and Poon, Warren 2007, An examination of Australian gold mining firms' exposure over the collapse of gold price in the late 1990s, International journal of accounting and information management, vol. 15, no. 2, pp. 37-49.

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Title An examination of Australian gold mining firms' exposure over the collapse of gold price in the late 1990s
Author(s) Fang, Victor
Lin, Edward
Poon, Warren
Journal name International journal of accounting and information management
Volume number 15
Issue number 2
Start page 37
End page 49
Publisher Emerald Group Publishing
Place of publication West Yorks, U. K.
Publication date 2007
ISSN 1834-7649
1758-9037
Keyword(s) gold
stock returns
stock prices
hedging
Australia
Summary Purpose – The purpose of this study is to examine the exposures of Australian gold mining firms in the highly volatile period from 1995 to 2000. This period has been characterized by significant changes in gold price due to bulk sale of gold by collective central banks. Specifically, the paper aims to investigate several firm-specific factors that are hypothesized to carry substantial influence on gold beta.

Design/methodology/approach – To estimate gold beta, we use the following multifactor model: Rg,t = a+ßgGPRt + ßxFXRt + ßmRm,t + Et , where Rg,t is the return on the gold stock Index at time t, GPRt is the gold price return denominated in US dollar at time t, FXRt is the foreign exchange return of Australian dollar in terms of US dollar at time t, Rm,t is the market return at time t, and Et is the random error term at time t.

Findings – The paper finds that the values of gold beta are consistently greater than one, implying the sensitive nature of firms’ stock returns to gold price changes. This also suggests that investors holding gold mining stock would receive higher percentage increases in stock returns from a percentage increase in gold price returns, as opposed to investors holding gold bullion. Furthermore, these values have changed substantially over time with significant changes in gold price volatility. The most important and consistent relationship that we find is the impact of firms’ hedging behavior on their respective gold betas. This is consistent with Tufano’s study. It implies that firms, which hedge a greater proportion of their gold reserves, are less sensitive to movements in gold prices. The finding therefore supports the risk management theory that hedging increases shareholder’s wealth. However, cash operating costs, cash reserves and the level of gold production seem to influence very little on the firms’ exposure to gold price changes.

Originality/value – This study is of interest and important to the stock mining companies and investors because the extent of the effect of gold price movements on the stock returns of gold mining companies has significant impacts on returns for both firms and investors especially in their risk management and investment decisions, respectively.
Notes Reproduced with the kind permission of the copyright owner.
Language eng
Field of Research 159999 Commerce, Management, Tourism and Services not elsewhere classified
Socio Economic Objective 970115 Expanding Knowledge in Commerce, Management, Tourism and Services
HERDC Research category C1.1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2007, Emerald Group Publishing Limited
Persistent URL http://hdl.handle.net/10536/DRO/DU:30042543

Document type: Journal Article
Collections: School of Accounting, Economics and Finance
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Every reasonable effort has been made to ensure that permission has been obtained for items included in DRO. If you believe that your rights have been infringed by this repository, please contact drosupport@deakin.edu.au.